UK Edition
Questor: Bunzl’s halo has slipped and the shares have plunged. Time to buy
Questor share tip: until recently it was a pin-up of the support services sector, but a hiccup in the US has sent investors running for cover
A buoyant United States economy has powered numerous British firms over the years. When he was chief executive of Diageo, the gin-to-Guinness drinks giant, Paul Walsh insisted the US was his number one emerging market.
With sterling so weak against the dollar since the Brexit referendum, those UK firms with a heavy Stateside presence have seen their revenue line flattered.
Despite economic growth of 3.2pc in the first quarter – more than six times Britain’s rate of growth in the same period – Donald Trump would like to go faster, except his campaign to cut interest rates has so far fallen on deaf ears at the Federal Reserve.
So when a company comes up short because of an underwhelming performance in America, the market takes notice. Especially if that company happens to be Bunzl, which has been an incredibly reliable investment – even if it remains cloaked in anonymity for many.
Until recently Bunzl was a pin-up of the support services sector. It may be hard to get excited about paper plates, plastic cutlery, surgical gloves, meat trays, mops and buckets, yet these mundane essentials have proved to be extremely lucrative, as long as they are supplied in their millions every day.
The turnover of Bunzl – which traces its roots to a firm set up in 1854 by a Slovakian haberdasher, Moritz Bunzl – has grown by an average of 10pc a year since 2004 and become a FTSE 100 staple.
The halo slipped last month when the company warned that underlying revenue growth in the first quarter came in at about 1.5pc – roughly half what the market had been expecting. Within that figure, North America – a region that accounts for half of group operating profit – grew at only around 1pc because of the lack of volume growth and inflation in the grocery and retail segments.
- Read Questor’s rules of investment before you follow our tips
From peak to trough, the shares fell by 18pc in the space of a month. That seems an awfully big slide when analysts at Citi, the bank, think the slow start to the year will shave £17m from its forecast earnings of £657m.
However, the bigger question is what this hiccup says about Bunzl’s future. Citi downgraded earnings by the same 3pc next year and the year after that too. At least the dividend, which has grown by an average of 10pc for the past 26 years, is still forecast to rise. The warning brought to the surface a number of nagging doubts.
Large contracts can make revenues lumpy and Bunzl had a strong 2018. However, margins have been softening and only some of that can be attributed to rising US wage costs. And then there is the competitive threat from Amazon Business, a division of the technology giant that lets firms order everything from laptops to cleaning supplies.
Of less worry is Bunzl’s heavy dependence on plastic items. The company must manage the shift to greener alternatives but that might not necessarily mean lower revenues. Paper straws are four times the price of plastic ones, for example.
Investors might also be jittery after it was subsequently announced that the finance director was stepping down later this year. Brian May has spent 13 years in the job and 25 years with Bunzl. It is a company of long servers. In fact, the chief executive for the past three years, Frank van Zanten, joined the firm in 1994 when Bunzl acquired his family business in the Netherlands.
Acquisitions have been a key part of Bunzl’s story, generating three quarters of recent growth and developing operations from 12 to 31 countries in the past 15 years. They will continue to be.
The company keeps about 1,000 potential takeovers on its radar, mostly of small firms that would not appeal to private equity buyers. The rate of return has slowed, however, and analysts at JP Morgan Cazenove, the broker, said they would be concerned if Bunzl’s return on invested capital fell much below last year’s 15pc, the lowest level for quite a while.
All of this suggests the investment case is finely balanced. The company is not due to give any further clues until a trading statement late next month. Questor judges that at this level, trading on about 16.5 times this year’s forecast earnings, Bunzl still appeals – even if the solid returns of the past may be harder to come by.
Questor says: buy
Ticker: BNZL
Share price at close: £20.90
For the best of the Telegraph's investment analysis, advice and expert opinion, sign up to our weekly newsletter.
Read the latest Questor column on telegraph.co.uk every Sunday, Tuesday, Wednesday, Thursday and Friday from 6am.